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Home truths

The quote comes from the playwright John Webster writing in the 17th Century but it could just as well be a more poetic paraphrase of a sentiment often uttered by the governor of the Bank of England in the 21st Century. Mervyn King has repeatedly joined other distinguished economists in pointing out that house prices remain at very high levels, by whichever yardstick you choose.

In theory, the recent rise in interest rates, and subsequent warnings of more to come, have nothing to do with house prices. They are about petrol edging up towards an average of 1 a litre and gas bills jumping by nearly 50 per cent.

But, in practice, any interest rate decision in this country has everything to do with the housing market. Even a quarter-point rise will hurt disposable incomes when it feeds through to monthly payments. It will also affect the amount that people can borrow to buy.

Never mind petrol prices. To a greater extent perhaps than ever before, British people judge their sense of economic well-being on house prices. Ask how wealthy they feel and they will think of one thing – not their salary or their spending but the value of their property. If they bought their house six years ago, it will have doubled in value on average. What do petrol prices matter to the typical homeowner? He or she is safe.

It is the same remarkable story. “I bought my house for 20,000 in 1975 and now it is worth 500,000.” It no longer even raises an eyebrow. The dream of easy money is a reality.

Or is it? Let us not forget that the doubling of house prices is devastating if you want to buy a home for the first time and do not have a mum or dad who is willing to help. Young people are priced out of the housing market all over the country. The average couple trying to raise a family has much less chance than their parents’ generation did of owning a home big enough to accommodate them.

These ill-effects of house price rises are typically reported in parentheses, as if they were only a minor consideration. Perhaps this is because the people who do the reporting are almost all homeowners. To those who have made money on the market, house price rises seem benign, even exciting. They seem like easy money.

Have we become, as John Webster might say, bewitched by this seeming prosperity? Let us focus the question further. Are we taking important financial decisions because we believe we have been enriched by the housing market?

The answer has to be yes. Here is just one example – debt consolidation. On an unprecedented scale, homeowners with equity in their homes are cutting their monthly payments on short-term debts like car loans and credit cards by refinancing them. It seems like a miracle. The monthly payments are cut in half with no apparent payback. There is a payback, of course. That short-term debt has become a long-term loan secured against your property for 25 years. The total amount to repay is far higher than it would be on, say, a five-year personal loan.

If house price inflation comes down, the amount you owe will not shrink compared with what you own. If earnings inflation stays low, those payments will not shrink over time against your earnings.

But how many customers are worrying about that? They think that house prices have made them better off so they can afford it.

Yet the truth is that rising prices do not make us better off. If I buy a house for 100,000 and prices rise by 50 per cent, I may feel better off but consider what really counts – the price of the next house I want to buy. If it was 200,000, it will now be 300,000. Price rises have brought me 50,000 but they will cost me 100,000 when I try to trade up. Overall, price rises have cost me 50,000. The only people who benefit are those who want to trade down to a smaller house or exit the market.

Like the villagers in the children’s story of the boy who cried wolf, we have stopped believing in a house price crash. We have heard it too many times and our fears are yet to be realised. In the mean time, we will carry on spending. Money Marketing50 Poland Street, London W1F 7AXSesame’s chief executive Patrick Gale has made a clarion call for advisers to professionalise.

He believes the financial services industry has a unique opportunity to benefit from principle-based regulation.

He is also upbeat about where IFAs and standards of advice are at the moment, believing that many of the problems of the past will not be repeated because of better standards of advice, disclosure and documentation. But he says advisers must go further.

If they succeed, the benefits will include less onerous regulation but he says, more importantly, there should be no more damaging hits to consumer confidence from the FSA needing to take action.

His ideas involve more training but he also points to action that Sesame has taken on income drawdown where it licensed permission.

Despite initial member protests, he says Sesame members doing drawdown have raised their game and are doing better quality business and making more money as a result.

There is little to fault in what Gale says and he may be saying it at just the right time.

The FSA has made much of its move to principle-based regulation but we sense that it has paused for thought when it comes to the retail market. The advice market and big groups such as Sesame will need to do some convincing.

Indeed, Money Marketing still needs convincing. A move to principle-based regulation should not involve simply leaving advisers in the dark, only to face the wrath of the FSA at a later date.

But by and large, the FSA moving to this basis should be good news.

So Gale’s call makes sense – a professional advice industry is more likely to be one that is left alone to better advise clients and run their businesses without regulatory interference.

Of course, Gale is not talking about commission structures or any possible fees.

He is talking about standards of advice and standards of qualifications plus a more professional approach to running advice businesses.

We support his call but we still need a debate about what exactly professionalism means.

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21st January 20193:05 pm

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